An extremist, not a fanatic

October 24, 2008

Recession: no big deal

Welcome to recession. Today’s official figures show one began in the summer. But let’s remember two key facts.Fact one. The notion that recessions cause job insecurity is bull. Even during good economic times, millions of people are at risk of losing their jobs. On one estimate, one in seven private sector jobs was destroyed each year between 1997 and 2005. And recessions don’t increase this insecurity much. Indeed - using US evidence - Robert Hall has found (pdf) that job destruction doesn’t increase much at all in recessions. Instead, what happens is that the job creation rate slows down:

Changes in separation rates that accompany employment changes at the industry or aggregate level are tiny compared to the regular flow of workers out of jobs…Unemployment is high in a recession because jobs are hard to find, not because more job-seekers have been dumped into the labor market by elevated separation rates.

This might be happening now; as I’ve pointed out, the redundancy rate now is still quite low, so perhaps at least part of the rise in unemployment is due to slower job creation.Fact two. Recessions are not extraordinary events. Since 1955, quarterly GDP growth has averaged 0.6%, with standard deviation of 0.96. So a fall in GDP is a less than one standard deviation event (though they‘re not normally distributed). A lot of the excitement this downturn is generating is, therefore, simply because we’ve become accustomed to years of stability. But in the longer historical context, it's these years that were unusual, not the regular experience of recession. And as Stephen Miller has shown, this Great Moderation ended last year. This could well be because the stability was only ever due to dumb (pdf) luck (pdf). And our luck might have run out.What I’m saying, then, is that recessions are no big deal. They are a normal feature of a capitalist economy. The important point, is that economic insecurity is huge even during “good” times. That’s the price we must pay for creative destruction. Recessions change this only a little. The question: "what can policy-makers do to stop recession?" gets too much attention. The question: "how can we protect people from the big risks they face even in normal times?" gets too little.

Comments

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I don't care that much if I lose my job when I know I can find another one with ease. It strikes me that economic insecurity is more to do with how easy it is to find a job than with how likely you are to lose your current one. So I'd say that recessions are a 'big deal'. That said, I agree that it's a waste of effort and resources trying to prevent recessions.

I've always believed that human advancement is entirely down to the cock-up theory - a balls-up leads us further down a particular path. I'm quite sure the same thing happens in the economy ( real or imagined)with, on average, decisions balancing out. Its when they don't that we get eg upturns - or downturns.

Those job destruction figures include people who leave their jobs voluntarily, so long as they are not replaced. I don't know how significant that is. Mightn't involuntary job destruction rise in recessions?

In good times you leave a job that has no future and move to one which has. In a recession, you lose a job that has no future and you wait around a damn anxious while.

In a bad recession, your wife or husband is waiting around for a new job too. In a depression, so am I.

We have recessions. We probably need recessions to shake the surplus stocks, bad debts, zombie companies etc. out of the economy. If so, surely we should plan for them to be sharp and short? and not depressions?

Economic growth is something we've been told that we need for a healthy economy, yet infinite growth isn't actually possible. Surely economists knew that the economy was being overinflated purely to satisfy governments and investors. So why is it such a surprise that the bubble is bursting after such a prolonged period of growth followed by a period of artificial growth?
It may certainly shake things up a bit in the short term, but whether lessons will be learned from economies that rely heavily on unrealistic growth is unlikely.

"We have recessions. We probably need recessions to shake the surplus stocks, bad debts, zombie companies etc. out of the economy. If so, surely we should plan for them to be sharp and short? and not depressions?"

The trouble is that an alternative line of plausible a priori reasoning can lead to opposite conclusions - namely, beside the social pain inflicted by output (and employment) volatility, the volatility may also depress the animal spirits of entrepreneurs by increasing the perceived risks and uncertainty associated with business investment. Resolving the issue is a matter of the empirics, not a priori theorising.

Abstract
This paper empiricaally investigates the relationship between long-run growth and output volatility. There is an emerging literature on the topic which is inconclusive on the size and direction of the relationship. We analyse this relationship empirically for the time series experience of 21 OECD countries between the years 1961 and 2005. After applying a pooled OLS estimator and a series of robustness checks we conclude that there is strong empirical evidence for a positive relationship between output variability and economic growth.http://cadmus.eui.eu/dspace/bitstream/1814/7085/1/RSCAS_2007_22.pdf

Btw how do we plan for recessions to be sharp and short? Surely not by Keynesian fine-tuning of aggregate demand by activist fiscal interventions? What would that do for downstream rational expectations?

Thanks for the reference. In itself, at first reading the paper looks a pretty solid piece of work. I doubt, as the authors do, that it is conclusive; but the statistics appear strongly suggestive. The previous literature is covered a great deal better than I could manage.

I dislike recessions, but I like the economic growth which is extracting humanity from poverty more than I dislike recessions. Those are my value premises.

There seems no theoretical model that I can get my mind around which gives us economic growth without recessions. On the practical side, every proclaimed arrival of the end of business cycles has been followed (usually pretty promptly) by the end of one. I therefore see recessions as lesser evils; evils to be accepted and managed.

My guess is that the best available way of planning for recessions to be short and sharp is to monitor major growing imbalances in the economy, with the intention of hitting them hard (usually through monetary restraint) before they become critical. The broad idea is force the losses and get it over with. What that would do to long term expectations is moot, but my guess is that the markets' response to knowing that policy was in place would reinforce the policy - i.e. tend to make the recession shorter and sharper.

"In the past year, board members of the Olympic Organising Committee received £1,000 per two-hour meeting and the chief executive, Paul Deighton, a former Goldman Sachs banker with a personal fortune of more than £100m, was paid a salary of £557,440. The committee chair Lord Coe splits his time between his Olympic work, for which he receives more than £250,000 a year, and managing the Complete Leisure Group, a sports marketing company he established, with the former bankrupt and tax exile Peter Abbey, a month after Britain won the 2012 bid."http://www.independent.co.uk/sport/olympics/london-2012-a-gold-medal-muddle-968634.html

Is there not the more cynical explanation that most people in the social stratum journalists know (professional/managerial classes, in the main) have made an implicit trade off by getting a higher wage for a more specialised skill set - there are only a limited number of posts in such skill sets, and as such, the impact of a recession proportionately magnified - I was made redundant in the mini-crunch of 2002/03, and the effect this had on the reasonably specialised field I work in was startling, albeit unnoticeable in the economy as a whole.

After reading posts to Conservative Home and the letter from 16 "leading" economists, I'm not surprised at this:

"The Tories' advantage over Labour has been reduced from 19 to eight percentage points in the past two months, according to a poll by ComRes/The Independent. The Conservatives now have 39 per cent of public support, compared with 31 per cent for Labour and 16 per cent for the Liberal Democrats. The finding raises the prospect of a hung parliament being returned if a general election were to be held soon. . . The poll's results are likely to intensify fears held among some Conservatives that the party's leadership has not dealt well with the global financial crisis, while Mr Brown's £500 billion bail-out plan for British banks has been replicated by other governments around the world."http://www.telegraph.co.uk/news/newstopics/politics/labour/3272784/Tory-lead-slashed-by-Gordon-Brown-shows-new-poll.html